Covid-19: What is being done to help states and financial institutions

It is at times like these that we must realise what is truly important and valuable in our lives and that we do not live in economies, we live in societies and communities.

In that regard, it was fitting that Mario Draghi, the man who presided over the ECB until the end of last year, began an op-ed piece last week, not by discussing economic issues, but by stating that “[t]he coronavirus pandemic is a human tragedy. Many today are living in fear of their lives or mourning their loved ones. The actions being taken by governments to prevent our health systems from being overwhelmed are brave and necessary. They must be supported”. 

While the health and well-being of citizens must always be put ahead of narrower economic considerations, to completely uproot the way in which our societies function and the various legal obligations which our citizens and companies have entered in to will not be easy. To do so would require a level of ideologically unity from governments across the globe that is, frankly, simply not realistic. Even at an EU level, leaders debated each other for over four hours last week, with no concrete outcome. Thus, actions to date have been largely about bending the rules or adopting temporary measures which could only be ‘justified’ in a time of crisis. This has helped to buy policymakers valuable time to consider their next move.

Healthcare is obviously the number one consideration at this time and as Draghi noted, the extraordinary measures being taken to ‘flatten the curve’ are necessary. Another issue of significant concern is employment. We have seen millions of workers lose their jobs, at least temporarily, all over Europe in recent weeks and regrettably more are likely to follow as businesses are forced to close as part of the unified front against Covid-19.

This creates an immediate problem as many of those who have been let go from their jobs will not have significant amounts of savings to fall back on, or indeed, perhaps none at all. This will invariably require national governments to massively increase spending on social welfare in an effort to bridge the gap between households required spending and their incomes. Given that this will come at a time when government tax revenues will plummet, it will create an immediate need for most states to issue large amounts of public debt, in the form of bonds. However, at a time when the long-term impacts of the pandemic are highly uncertain, the rate at which purchasers of government debt will want to be compensated will be high, adding to the difficulty and cost of fighting the current crisis. Although, at least the European Council did move quickly to suspend the fiscal deficit targets contained in the EU ‘Stability and Growth Pact’, allowing governments to ramp up borrowing.

This raises the issue of ‘solvency’. If a company is unable to repay its debts, including not only things like loans, but also rent or wages, then it is judged to have become insolvent. The same reasoning applies to nation states. Government debt as a percentage of GDP in the EU heading into this crisis was likely somewhere close to 80 per cent. This will shoot up very quickly as GDP falls and debt increases. To understand that a country can indeed become unable to repay its debts and/or borrow money at affordable prices, we need only look as far as the crisis which engulfed countries like Greece, Ireland, Spain and Portugal back in 2008.

While the ECB, it could be argued, did not act quickly enough back then to stave off catastrophe, the Central Bank, now under the leadership of former French Finance Minister and Head of the International Monetary Fund, Christine Lagarde, has not shown as much hesitation this time around. The ECB announced in recent days that it would increase its purchases of government and corporate bonds from €20 billion a month to around €33 billion a month, as part of its on-going ‘quantitative easing’ (QE) programme, before going on to announce an additional €750 billion Pandemic Emergency Purchase Programme (PEPP). Overall, the measures announced to date equate to over 7 per cent of the Eurozone’s pre-crisis GDP.

In effect, what the ECB is hoping to achieve with these measures is to keep borrowing costs across the EU down. The exact way in which this actually works is complex to say the least, as the ECB is not allowed to ‘directly’ fund national governments; so we can leave discussion of the technical details to another day. Suffice it to say, the ECB actions will help governments to borrow the additional money they will need at more affordable prices and help to support welfare payments to those most impacted by the pandemic. Many national governments have also announced domestic plans, including a massive €750 billion programme of public spending and lending in Germany.

Of course, the Germans are in somewhat of a privileged position, fiscally speaking, and other nations in Europe don’t have the luxury of such reserves. However, a full investigation of issues like ‘coronabonds’ or what role the European Stability Mechanism (ESM) might play, or even the basic issue of the ‘sufficiency’ of the actions taken so far at a European level are best left to others (see for example, CEPR, De Grauwe or Bruegel).

In terms of what the measures we have discussed might mean for social housing providers, while the moves to deal with the solvency of national governments are welcome, it seems inevitable at this point that many social housing providers in Europe will be impacted financially by the reductions in rental income as unemployment rises.

The degree to which this will be an issue will depend on two key factors; how much revenue they lose out on and how much money they owe and, crucially, to whom. The first factor is something of an unknown at this point and we are likely to see a high level of variation between regions and countries. On the second factor, most social housing providers will avail of various forms of government subsidy, grant or loan. The greater the percentage of debt that is owed directly to state lenders, the less risk there seems to be for housing providers. While state lenders may have strict repayment rules, we are living through extraordinary times and rules can be bent or broken completely, if needed. Given the important role of housing during this period of ‘self-isolation’, it makes no strategic sense for governments to put providers of housing for the most economically and socially marginalised under pressure with a strict application of lending rules.

Another common source of funding for social house building is domestic banks. With many borrowers now in difficult situations, it seems likely that loan defaults, even if only temporary, will increase in the coming months. However, our old friends at the ECB also have a plan for this. They are offering around €3 trillion of cash at negative interest rates, meaning banks will actually be paid by the ECB to take money.

The hope for the social housing sector, therefore, must be that banks will be in a secure enough position to at least temporarily ‘freeze’ or negotiate repayments from non-market housing providers, if required. Indeed, the ECB has stated that it “supports all initiatives aimed at providing sustainable solutions to temporarily distressed debtors in the context of the current outbreak”. As part of this, the Central Bank is willing to show “flexibility” in the application of its own rules on dealing with so-called ‘Non-Performing Loans’ (NPLs). This will help to increase the banks’ capacity to engage in counter-cyclical lending.

While the measures which have been discussed here are to be welcomed, as are the actions that many governments have taken to protect tenants, they can only form part of the solution to the Covid-19 inspired difficulties currently being experienced. Given that some of the job losses we have seen will not prove to be temporary, demand for non-market housing could well increase over the medium-term. A failure to put in place appropriate measures to handle private-sector rental arrears, could lead to a wave of evictions, rent increases or even more financialisation of the rental market, which will also put pressure on social housing providers. As Professor Manuel Aalbers (KU Leuven) pleads in a recent article on this issue; “Now is the time to bail out tenants”.

Thus, we must ensure two things going forward. Firstly, that supports to those in need at this time are sufficient, timely and in place for as long as is needed, not just until the end of the lockdown period. Secondly, that we start making plans today to make sure that the void left by the financial crash in 2008, which has led to so many of the difficulties we have seen in the housing sector in recent years, cannot be allowed to be repeated. As the Spanish philosopher, George Santayana, is often quoted to have said; “Those who cannot remember the past are condemned to repeat it”. Let us all hope that the memories of European policymakers, therefore, are true and accurate.

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